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New Tax Law Allows Small Businesses to Expense More and Expand Bonus Depreciation

Changes to the new tax law means that small business owners can immediately expense more of the cost of certain business property Many are now able to write off most depreciable assets in the year they are placed into service.

The Tax Cuts and Jobs Act (TCJA), passed in December 2017, made tax law changes that will affect virtually every business and individual in 2018 and the years ahead. Among those for business owners are tax rate changes for pass-through entities, changes to the cash accounting method, limits on certain deductions, and more.

– Section 179 Expensing Changes

You may elect to expense all or part of the cost of any Section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. These changes apply to property placed in service in taxable years beginning after December 31, 2017. For most businesses, this means the 2018 return they file next year.

Section 179 property includes business equipment and machinery, office equipment, livestock and, if elected, qualified real property. The TCJA also modifies the definition of qualified real property to allow you to elect to include certain improvements made to nonresidential real property.

– New 100% First-Year ‘Bonus’ Depreciation

The 100 percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances, and furniture generally qualify. The law also allows expensing for certain film, television, and live theatrical productions, and used qualified property with certain restrictions.

The deduction applies to business property acquired after September 27, 2017, and placed in service after September 27, 2017, and before January 1, 2023. In general, the bonus depreciation percentage is reduced for property placed in service after 2022.

You may elect out of the additional first-year depreciation for the taxable year the property is placed in service. If the election is made, it applies to all qualified property that is in the same class of property and placed in service in the same taxable year.

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